At first, a 529 plan may look like just another benefits brainteaser. Three out of four Americans have no clue what the thing is even though saving for college is a top financial concern for parents with children under the age of 18. So how can folks still make the grade and save enough money for the next chapter? Put away those flashcards — we’ll help you cram. In this article, you’ll learn why a 529 college savings plan might be the exact thing you need to kick your benefits package into high gear.
What is a 529 plan?
A 529 plan is a program that allows families to sock money away for their kids’ futures without having to pay federal tax and usually without having to pay state tax* on the earnings (only if they’re used for qualified higher education expenses like tuition, books, room and board, etc.). Companies can choose to match a portion of what their employees put in, similar to the matching game that happens with certain retirement plans. Think of it as a college-flavored version of a Roth IRA or Roth 401(k), just with a different set of numbers. This is because contribution dollars are after-tax, and therefore earnings are generally tax-free.*
Why are 529s a great benefit? Time to hit the books.
A 529 plan helps fulfill a real need many families have. Saving for college is one of the most colossal investments people will ever make, and it comes into focus well before retirement. Because of this, it can be an extremely meaningful (and unique) perk to offer your team, and at the same time, attract people who want to be on your team.
When Waco Oil & Gas launched their 529 plans a few years ago, it became an instant game-changer, vice president Doug Morris told the Wall Street Journal. “Especially in rural areas, the reason many kids don’t go on to further their education, whether trade school or college, is because they don’t think they can. This could be another tool to give kids the opportunity.”
Keep reading for a few more reasons why 529 plans can make a lot of sense:
- It can help your team save more: A Sallie Mae study found that American parents with children under the age of 18 who had college savings plans stocked away 76 percent more than parents who still saved but didn’t have an official plan.
- You might be able to nab some tax credits: Some states offer tax credits to employers who use their in-state 529 plans to help encourage more people to save for education. For instance, Nevada gives employers a 25 percent tax credit (up to $500 per employee) for matching 529 contributions.
How does it impact employees, tax-wise? While employer matches for 529 contributions aren’t safe from federal income tax for individuals, the earnings are generally tax-free as long as they’re earmarked for qualified education costs. Some companies choose to pour in a little extra to their match to help cover the income tax that employees need to pay on the employer match. In addition, over 30 states offer a tax deduction or credit to employees on their own 529 contributions.
- It helps people stay loyal: When your team sees that you’re (quite literally) invested in their families’ futures, it can really deepen their loyalty to you. Sending a child to college can be an emotional time for families, so easing the burden can be a pretty unforgettable thing.
- It builds culture: Your benefits package reflects all the things you value as a company. By showcasing how much you care about everyone’s life outside of work, it reinforces it to the rest of the team.
Talking to your team
The first step is to get a show of hands for how many people are interested in participating. Edward Jones found that 86 percent of Americans would participate in a 529 plan if their company offered it, and that number soars even higher for employees with high school kids (93 percent). However, you may want to keep your team’s average age in mind, since a younger team might not have such high participation rates as teams with oodles of kids.
Here are a few key things to point out to your team as you’re introducing the idea:
- Your employees will always have access to their plans: 529s will always belong to your employees, regardless of whether they stay with you or not (but hopefully they do!). Keep in mind that while employees will never lose their relationship with their plans, if a company is offering a plan through a platform, employees may not be able to use certain account features (like an account dashboard) once they leave.
- It will grow faster if you offer matching: As you pad your team’s accounts, the amount contributed will rise faster than if they were the only ones adding to it. So for people looking to grow their accounts, taking advantage of a match should be a no-brainer.
- It’s not just for parents: Think about all the grandparents, aunts, uncles, and other folks who want to help out their families with college savings. Some people also open 529s up for themselves so they can return back to school.
Launching a plan
There are a grab bag of ways you can use 529 plans to help your benefits package shine. To start, think about whether or not you’d like to contribute to each person’s plan, and if so, what the most is you’d want to offer, which is called your maximum contribution. You can still offer 529 plans without contributing any extra money, but many employers decide to do so to help their team get even closer to reaching their education goals. You can also try to encourage your employees to put away more by matching a sliver or all of their contribution.
Next, identify how you’ll make this all happen. Ideally, you’ll want to integrate the plan with your payroll service, which makes it easier for employees to participate. Some companies (like Gusto!) allow you to sync contributions with each payroll you run. You can learn more about how that works here.
By weaving a 529 plan into your benefits offering, you can help your team realize a wish that can impact their families forever. When that happens, your benefits package will turn into a giant magnet — attracting the right folks while bringing your team closer and closer to their amazing goals.
*Earnings within a 529 plan aren’t subject to federal tax and generally aren’t subject to state tax when used to pay for qualified education expenses. Anyone that invests in a 529 plan should check the applicable state tax requirements for the plans they invest in.
**The information contained on this site is not intended to be and does not constitute investment advice. Such information is general in nature and is provided solely for informational purposes and is not to be construed or interpreted as a recommendation. All investment decisions are solely the responsibility of the user.